Tuesday, September 25, 2012

Usual Rant on German Labor Market Reform

This is triggered by a skeptical post by Matthew Yglesias noting (and contesting) the argument that German unemployment is low because the Social Democrats reformed the law to make it easier for employers to fire workers.

I can understand why right wingers would want to praise Shroeder not Merkel*, but Merkel's job sharing scheme deserves part of the credit.

Beyond that, Germans have so much contempt for Spain and Italy that they compare Germany now to Germany in the past and totally ignore anything that ever happened in Italy or Spain. In fact you don't mention it either. Both Spain and Italy had radical reforms of labor law vastly reducing job protection long before Germany did. They now have dual systems where the lucky old people (such as myself) have incredibly secure jobs and most young people have very little job security (and you are young until age 35 over here).

In Spain, Italy, and Germany the people who had job security before the reform are grandfathered (ok in Germany just fathered as the reform is more recent -- well actually not so many grandfathers in Spain or Italy either as young Spaniards and Italians don't have kids till they have job security which is basically never).

The key difference is that the reform came much earlier in Spain (mostly under Felipe Gonzales but some under Adolfo Suarez -- remember him ?) . This means that, by continental European standards, huge fraction of Spanish workers didn't have legally protected job security (OK 35% compared to 85 90% in the USA). This in turn means that there were a huge gigantic number of layoffs when the bubble burst.

Job security reduces hiring in economies on the way up and reduces firing on the way down. The way to maximize employment in the medium run is to give job security to current workers and allow firms to hire new workers without giving them job security. the problem is that after a few decades of that, you have lots of workers without job security who become unemployed the next down turn.

Yes people in Germany are enthusiastic about the new reformed labor market. People in Spain used to be enthusiastic about their new reformed labor market. But newly reformed labor markets have the benefits and not the costs of the reform.

By the way actual economists Samuel Bentolila and Giuseppe Bertola explained all this in 1989.

* I'm not entirely joking. Major market oriented labor law reform reducing employment protection has IIRC always been implemented by center left governments. That was the case in Spain and Italy as well as Germany anyway.